Rocketing US prices amid overheating economies

News of sky-high inflation in the United States is almost losing its shock value.

When the country’s Bureau of Labor Statistics revealed its consumer price index data for December, the rise of 7 per cent was the biggest since 1982.

The numbers have only gone up since.

Overnight, a fresh high was revealed in the year to June at 9.1 per cent, this time the biggest lift in prices since 1981.

But while the headlines are becoming familiar, the pain is severe.

Today, finance firm Bank of America said it now forecasts a moderate recession in the USA this year, with a 1 percentage point lift in unemployment likely, and a resulting slowdown of inflation.

The overnight data shows the average American will be paying 10.4 per cent more for food this June than just 12 months prior, with cereals and dairy products posting the top jumps in that category.

A new car is costing an additional 11.4 per cent.

For medical care services, the lift was 4.8 per cent, and for electricity it was 13.7 per cent.

Interestingly, some of the biggest cities were not the hardest hit, with New York, Los Angeles and San Francisco all posting below average increases.

The focus of inflation data is often on prices, yet the impact extends further.

Inflation at 9.1 per cent means an American who had $20,000 saved at this time last year is now effectively about $1,800 poorer, with rising prices destroying the real value of money in a bank account.

The story is similar in Perth.

With inflation of 7.6 per cent in the year to March, a Western Australian saving for a home deposit with $20,000 in the bank would effectively have $1,500 less purchasing power for goods and services.

A worker with pay frozen is in real terms 7.6 per cent worse off, as is a person on a fixed income.

A worker whose pay does rise to match inflation will be paying tax on the increase, and so still ends up behind where they started.

Price rises, it seems, are a problem beyond borders.

But they’re not a worldwide problem.

It’s been reported that Japanese citizens have been frustrated with inflation levels in the country hitting as high as 2.5 per cent, much lower than most of the developed world.

Saudi Arabia’s central bank reported inflation of 2.2 per cent in May, while prices in Switzerland rose 2.9 per cent in the same 12 month period.

In Australia, there’s a long list of potential contributors consistently cited.

A lack of skilled workers. Supply chain disruption, silicon chip shortages, and east coast floods hitting food supply.

The war in Ukraine, too, pushing up oil prices and other commodities.

But in the US, inflation was at a four decade high before the invasion, and in Perth, it had hit 5.7 per cent in December.

That compares to the 2 to 3 per cent target of the Reserve Bank of Australia.

Japan uses petrol and imports oil, and yet inflation is much lower there. The country should surely also be impacted by supply chain disruption or silicon chip shortages as much as any other.

Floods in Australia’s east may have destroyed fruit and vegetable crops, but they don’t explain the price rises for food in the United States.

And there’s no doubt worker shortages are putting pressure on wages, but the 48-year record low of national unemployment and multi-decade record of high inflation follow other records: of stimulus.

The pandemic may have required a once in a century response temporarily, yet it's worth noting that the recent federal budget predicted spending in the 2023 financial year to be nearly $150 billion higher than pre-pandemic 2019.

In monetary policy, the RBA dropped its cash rate to 0.1 per cent and announced a previously unseen yield target policy.

From March 2020 to April 2022, the RBA’s balance sheet lifted from $190 billion to $620 billion, colloquially referred to as creation of money.

That’s going to be slowly wound back, the RBA has said.

In the United States, the monetary base almost doubled over two years.

Not so much in Japan.

One measure of the country’s monetary base lifted about 30 per cent over two years to 2022. Interest rates continue to be low, although in inflation-adjusted terms, Australia and the US are lower.

Fiscal policy was highly expansionary, with the debt to GDP ratio lifting, and record spending still in 2022.

All that suggests that the money supply is the key factor. 

In Saudi Arabia, the M1 measure of its money supply rose only 16 per cent in the two years to 2022, according to its statistics.

Economists have differing views about the usefulness of money supply measures as an indicator of the economy's prospects.

But one thing that's broadly been accepted is that when money is created at a very accelerated rate, price rises will follow, because it lifts the demand across the economy.

Even so, the impact will be felt at different speeds across different sectors.

It's worth noting that more items in the CPI basket are above the 3 per cent band than at any time since 1990, according to the RBA.

Central banks are already taking action now to slow price growth, with the RBA lifting its cash rate to 1.35 per cent in June.

To get inflation under control, however, will put pressure on the economy.

Federal Reserve Bank chair Jerome Powell reportedly even acknowledged that raising rates to slow inflation could risk a recession.

Yet slowing inflation, and squashing inflation expectations out of the system, would still be the bank's priority.

History shows that once inflation is loose, it is incredibly difficult to stop.

"My colleagues and I are acutely aware that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation," Mr Powell said.

"We are highly attentive to the risks high inflation poses to both sides of our mandate, and we are strongly committed to returning inflation to our 2 percent objective."

In the US, economic history has multiple examples of monetary policy over-inflating the system, an over-correction, a recession, and the cycle repeating.

No doubt the household in Arizona paying 12 per cent more (the Phoenix inflation rate) than 12 months ago for a basket of shopping will hope this time is different.